Pimco Sees 2 to 3 Rate Hikes by End of 2017 as Treasuries Fall

Pacific Investment Management Co. says the Federal Reserve may raise interest rates two or three times by the end of 2017. Treasuries tumbled after oil prices rose.

Higher economic growth and inflation would drive the central bank to act, Pimco said in a Twitter post Monday. The company, which manages the world’s biggest actively run bond fund and is based in Newport Beach, California, made the posting as rising oil prices added to speculation U.S. inflation will accelerate.

Investors preparing for a central bank move have made Treasuries the world’s worst-performing government bonds. U.S. securities due in 10 years and longer have fallen 5.8 percent in the three months through Monday, the biggest loss of 144 government bond indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.

“U.S. Treasury yields are likely to go up,” said Hideaki Kuriki, a debt investor in Tokyo at Sumitomo Mitsui Trust Asset Management, which oversees $78.9 billion. “The Fed will raise rates by 25 basis points in December. Oil prices are going up.” Yields may retreat in 2017 as the economy softens, he said.

Pimco’s Total Return Fund has returned 4.2 percent this year, lagging behind almost three-quarters of its peers, based on data compiled by Bloomberg. Its five-year performance beat almost 80 percent of its competitors. Total Return’s $84.4 billion in assets makes it the biggest actively run bond mutual fund, though it is smaller than two index funds run by Vanguard Group Inc.

Trading Resumes

The benchmark U.S. 10-year note yield jumped five basis points to 1.76 percent as of 7:02 a.m in London, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 slid 13/32, or $4.06 per $1,000 face amount, to 97 5/8. Treasuries opened in Asia after being closed Monday for a U.S. holiday.

The U.S., Australia and Japan will all hold long-term bond sales this week. Australia and Japan both plan to sell 30-year debt Wednesday. It will be Australia’s first offering of the maturity. The U.S. is scheduled to auction three- and 10-year debt Wednesday and 30-year bonds Thursday.

Oil Deal

The selloff in Treasuries is being driven by the decision of Saudi Arabia and Russia to cooperate to limit oil output, said John Gorman, head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc. West Texas Intermediate oil for November delivery jumped 3.1 percent Monday to $51.35 a barrel, the highest close since July 2015.

The decline was also being driven by Donald Trump’s performance in the presidential debate Monday, which may reduce the odds of the Republican nominee ousting the Democrats from the White House, Gorman said. The result is "a little more status quo,” Gorman said.

Treasuries are often used as a haven in times of uncertainty, while periods of stability reduce demand for the safest assets.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, expanded to as much as 1.69 percentage points, the most since May 3. The Fed targets inflation of 2 percent.